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Real-Life Example of a Free Renovation

How to get your money back after a renovation.

One of the things that we hear over and over is: Isn’t Toronto too expensive?  Isn’t Toronto too risky? There aren’t any good investment properties in Toronto.

To those people, we reply “It’s just because you aren’t working with the right Investor Realtor”.  

We get it.  Investing in Toronto is tough.  It’s a lot harder to invest in Toronto than it is to invest in Hamilton, or Windsor or Waterloo.  It’s a lot harder to find a cashflowing property in Toronto… but it is very much possible if you’re looking at real estate through the right lens.

Not everything in Toronto will be handed to you on a silver platter.  Because property prices are much higher, it means that mortgages are much higher… and as a result, it is harder to obtain cashflow positive properties.  While they do exist, and while we do find them for clients, they are far and few between.  This leads some investors to create those opportunities themselves.

One of the best investments in Toronto is a Legal Luxury Triplex conversion.  It does take considerable resources to undertake, but for those who have the means, it is a solid way to invest.  Not only do you get the equity upside from the change of use from a single-family to a legal triplex, but you already get increased rents.  And after refinancing at the higher property valuation after the renovation, you can often get back almost all of your renovation money back in the form of an equity takeout.

Here is a recent real-life example of a Legal Luxury Triplex conversion that a client completed:

  • Acquisition: $1.3M
  • Downpayment (20%): $260k
  • Mortgage (80%): $1.04M
  • Closing costs & LTT: $50k
  • Reno: $500k
  • Length of reno: 12 months
  • Carry costs: $60k
  • Total invested capital (downpayment, closing, LTT, reno, carry costs): $870k
  • ARV Market value: $2.1M
  • ARV as per appraisal: $2M
  • Refi mortgage (80%): $1.6M
  • Equity takeout: $560k
  • Net invested capital: $310k

Just to put it in perspective, $310k of invested capital would normally only be enough for an $1.3M property ($260k downpayment + $50k closing/LTT).  But instead, our investor is holding a $2.1M property for that same amount of capital.

And then with rents at $8400 across those 3 units, and expenses at about $1200 and mortgage payments at $6000, the property cashflows about $1200… even after the increased mortgage!

At the same time, it took a lot of time and effort to create this opportunity.  We illustrate this example to demonstrate that there are indeed solid investment opportunities in Toronto if you have the capital, mortgage qualification, and savviness to make it happen.  It might not be for everyone, but if you think this might be for you, reach out to us and let’s have a conversation about it.

The BRRR Model

The BRRR Model

A powerful strategy that allows you to create value.

When investors want to take their investing to the next level, they often employ the Buy Reno Rent Refi model.   It is a powerful strategy because you are able to create value, and when done right, this can result in getting almost all of your renovation dollars back out of the property… and in a best case scenario, you MAY be able to even get some of your downpayment back!  This also amplifies the ROI on the project due to the smaller amount of capital left in the property (i.e. the returns are based on a smaller amount of invested capital), and it allows many investors to roll forward with another project since they got a significant portion of their capital returned.  As an example, this effectively means that you are able to invest in a $2.0M for effectively the same amount of cash as if you had purchased a $1.3M property.

While this may seem like a killer strategy, this is not a strategy that is well suited for beginner investors due to the potential pitfalls.  Your business model needs to be rock solid and you need to be extremely confident in your financials.  And… it goes without saying… you need to be comfortable with large scale renovation projects.

Volition has helped many clients execute on the BRRR strategy in Toronto.  In fact, Volition wrote an article about this for HGTV, which you can read about here.

Breaking down the 4 stages:

Buy

You need to buy a property that has the potential to be turned into a more expensive property through renovations or other means (such as severance, change of use, etc.).  Not every property is a good candidate for this, and in fact, primary residences aren’t always a good candidate for this either.  Why?  This is due to the fact that YOU will be paying off the increased mortgage yourself… whereas in investment properties, the increased rents will offset the increased mortgage.  Other things to consider is whether the finished product can hit the After Repaired Value (ARV) that you are looking for after you put it to highest and best use.

Reno

Renovations are the most common means through which investors create value.  Oftentimes, you need to be doing large scale renovations in order for it to truly create value.  Just doing a light cosmetic renovation may not get you to where you intend to go.  This is due to how appraisers valuate your property.

 

Rent

Now that the apartments are nicer, you can lease it out at higher rents.  This is important because of the next step

Refi

Refinancing at the higher property value means that you do an equity take out.  This can result in getting almost all of your renovation dollars back out of the property (or sometimes even more)!  This higher mortgage means that you have higher mortgage payments, so that’s why it’s important to get the higher rents which can offset the higher mortgage payments.

The best way to approach a BRRR is to begin with the end in mind.  What is the target valuation that you are trying to achieve for this property and can you qualify for the full 80% LTV of that valuation?  Then working backwards, you need to ask: what renos are required and expected of an appraiser in order to give me that valuation that I am looking for?   Appraisals are such an important part of the BRRR strategy that we’ve written another article about it here.  And the next obvious question is how much will a reno like that cost, and how long will it take?  And finally, you need to determine the property purchase price you need to acquire at so that the business model works.

There are other things you need to consider as well, such as carry costs, reno budget overages, reno timeline overages, contingency “what-if” scenarios, etc.

Here is a real-life example.

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